On the Third Hand: Donuts

A lot of health policy experts seem to have a happy combination of low-deductible health benefits, inherited wealth and/or credit cards with high credit limits.

They love talking about how wonderful it is to give consumers “skin in the game” because they know that, if they ever have to deal with a high deductible, they just put it on the credit card.

Then many of these health policy specialists go after the lenders that offer medical financing for patients with iffy credit for charging high interest rates (to earn high returns, and, also make up for the reality that getting patients with iffy credit to pay the loans back may be challenging.)

What skin-in-the-game lovers don’t get is that, once the Great Recession hit, credit card companies slashed consumers’ credit limits. Even consumers who have paid all of their bills and have steady jobs may be trying to get through the day with $500 in total borrowing capacity.

Meanwhile, the Patient Protection and Affordable Care Act (PPACA) is encouraging moderately broke consumers, or those with incomes of about 250 percent to 500 percent of the federal poverty level, who cannot qualify for PPACA out-of-pocket cost reduction subsidies and, at the same time, are often living paycheck to paycheck, to buy bronze-level coverage with $6,000 individual annual out-of-pocket maximums, and $12,000 individual family out-of-pocket maximums.

This does not compute. Broke families with serious health problems may not have $12,000 in ready cash, even if they have bought fine supplemental coverage. And it looks as if the Obama administration loathes supplemental coverage (see: the war against rich Medicare supplement benefits), because good supplemental coverage reduces skin in the game. 

Policymakers can’t solve the problem by capping coverage for, for example, a few people we don’t know who have truly catastrophic health problems, because people with jumbo claims account for only a small percentage of total U.S. health care spending. Most of the spending is on patients with ordinary big claims.

Proposal: If any form of the current system continues, instead of using out-of-pocket costs both to modify patients’ behavior and cut plan spending, limit out-of-pocket costs to the levels needed to modify consumer behavior. Don’t set the limits so high that, to the consumers, they look like catastrophic costs.

Borrow an idea from the Medicare Part D prescription drug program and put the out-of-pocket costs that a plan won’t pay somewhere in a “donut hole,” or a gap between the routine costs that the plan covers and the catastrophic costs that a plan covers.